No matter what your reason is for selling your dental practice this article will review some best practices for preparing and selling your practice. Ideally, the process of selling your practice begins three to five years out from selling your practice, so call your ADS broker to set yourself us for a smooth and profitable practice transition.
Financial Planning for Your Dental Practice Transition:
In preparation for your retirement, you need to pay off your debts, make a list of your assets and your future sources of income, know or determine your monthly and yearly cost of living expenses, and decide on the hobbies, projects, or your next job that will occupy your time after the transition. Some dentists have the perception that their largest asset is their dental practice. However, in many instances, the net gain after taxes from a practice sale is equivalent to working 1.5 – 2 years longer as an owner. Get your financial house in order as you prepare to sell your practice. It is important to remember that the profits from the sale of your practice are also subject to income tax. An ADS broker can work with you and your CPA with suggestions to reduce the tax burden at the time of the sale.
Types of Dental Transitions:
The size of your practice and the overhead of your practice may determine your dental practice transition plan. The simplest practice transition is a ‘Turn Key Sale’ where the seller walks out as the buyer takes over. This is more common with practices having a gross income under $700,000. Larger practices can choose to hire an associate now and sell later, sell now, then be an employee, or to divide the practice and sell a portion creating a partnership or solo group practice.
Dentists owning more than one location may wish to sell one of two locations or both locations. An ADS broker will help you wade through the possibilities stress-free after examining your profit and loss statements to determine what type of transition works best for you and meets your desired goals.
Dental Practice Valuation:
Is your dental practice ready for a profitable sale? Do you know how much your dental practice is worth? Don’t settle for an informal, DIY practice appraisal. A skilled ADS broker, preferably with a CVA (Certified Valuation Analyst) designation, will perform a dental practice valuation to price your practice correctly provide insight on how to increase the value of your dental practice. Valuation is not a simple multiplication of your gross income. Practice value is based on location (rural or urban and area of the country), demographics and dentist/population ratio, local economy, education levels of the population, practice income, and practice overhead. Post-sale employment of the seller and insurance mix, (PPO, HMO, Capitation or Medicaid) also affect the value.
Most “for sale by owner” sellers chase off the best prospects by asking too much or they lose money by undervaluation of their practice and sell themselves short. An ADS broker will give you suggestions on preparing your practice for sale and coach you on negotiating a practice sale. We explained that one myth of sellers is that they are selling potential and potential should bring a higher price. Potential is a selling point, but it does not increase the value. The Cash Flow (income stream or profit margin) is usually what is being sold. An ADS broker will help you maximize the cash flow for the best possible fair price.
Getting your facility ready for sale:
Buyers are attracted to nice facilities and new equipment, but if a seller purchases new equipment in order to sell his practice, he will not recover dollar for dollar the new equipment expenses in an increased price of the practice. In the year prior to the sale, it is usually beneficial to clean up and spruce up your facility, but it is not wise to purchase new equipment expecting a return on your investment.
The purchase of new equipment is only done if you still have time to get some use of that equipment. Purchase or upgrade based on a timeline.
2 years or less
- small upgrades and equipment repairs
- Strongly consider digital radiography
- If something old breaks, consider replacement
5 or more years
- Digital radiography at a minimum
- Computerize your office and treatment rooms
- Larger equipment purchases start to make sense
Advertising and screening for your potential buyer:
The buyer must be able to pay the practice overhead expenses, pay the note to the bank and still have enough profit to pay his or her personal living expenses.
Unless you are in a very rural area and are willing to owner finance, your best buyer is not going to be the new dental senior with no experience and a mountain of debt. There may be the exceptional student with no debt, a savings account and the hand skills and know how to run a practice, but this is the exception, not the rule.
ADS brokers advertise your practice using the national website, local websites, state and local dental newsletters and by staying in touch with dentists and vendors in the industry. Letters, e-mails, phone calls and postcards are also utilized to reach potential buyers. Because of the constant advertising, ADS brokers are in touch with dentists looking for a practice to purchase. In addition, an ADS broker has the skills to screen the buyer and not waste your time with “shoppers” who have no ability to obtain financing.
Dentists who attempt to sell their own practices often seek out an ADS Broker after they see the mounting costs of advertising and experience the frustration of fielding phone calls from “shoppers”. Offers to purchase your practice are usually contingent upon financing. A full price offer from someone who cannot get the loan is worthless. Weak buyers waste your time. ADS brokers have the skill and expertise to qualify buyers for purchases early in the transition process.
Financial documents required and buyer funding:
Lenders look at two things when loaning money to a buyer. The first is three years of your practice income tax returns and your most recent profit and loss statement. If you own more than one location and are selling one or both separately, the lender will require separate financials for each location.
The buyer’s history is also an important part of obtaining financing. If your buyer just purchased a home and a car, has high credit card debt or large student loans, has no savings or has declared bankruptcy in the past, it may take a lot of work to find a loan for the purchase of your practice. Your ADS broker will know how to navigate these hurtles and will also guide you when it is time to seek a more qualified buyer.
What can I expect once a credit worthy buyer is found?
Creditworthy savvy buyers will perform chart audits because patients are the biggest assets of the practice. The buyer wants to determine if the seller and buyer have a similar treatment philosophy. The buyer also wants to establish an active patient count, confirm if treatment plans are present, review charts and have an equipment evaluation performed. Your ADS broker will guide you on the proper time for each of these steps.
If you are selling real estate, each state has laws and rules that govern the sale. Do not sign with a realtor to sell your building if you are planning on selling your dental practice. Your ADS broker can help sell real estate too and It is typically best to sell the real-estate with the practice. Meet with your ADS broker first to examine the options. If you do not own your building and have a lease, your lease should be transferable and you should have several options to renew.
Your ADS broker has screened dental lenders and knows which banks will provide the funds and get the job done and which banks will still be requesting documents a year from now. Your broker will also let your or your CPA know which documents are required by the bank to make a successful transition.
Attorneys–ADS brokers will provide sample documents or recommend an attorney who is knowledgeable of dental transactions. Follow your broker’s advice on attorneys and do not make the mistake of using an attorney friend who is not knowledgeable about dental transitions.
Selling your own practice to save money is like going to your banker for a haircut. The baker may be well educated in his field, and he may get the job done, but the results will not be pretty. Last week at a state dental meeting, a dentist stopped to tell the story of his “for sale by owner”. His profits from the sale were all used up in post-sale litigation. He stated, “I was a good and honest dentist, and I thought I was up to the task, but it is hard to avoid cliffs that you do not know exists”. Another seller came by to say that in order to save money, he signed up with a broker who represented both sides. He said, “Looking back, it would have been worth double the full fee to get the job done correctly”.
Your ADS broker will be happy to let you speak with previous clients for references. It will be one of the best phone calls you will ever make.
Jed Esposito MBA, CVA / ADS Precise Transitions / 303.759.8425